VC Perspectives from a Former Entrepreneur – Jeff Bussgang

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Monthly Archives: January 2016

As a former entrepreneur, I have always viewed venture capital as a service business. That’s a funny line for many because, historically, VCs are viewed (and at times reviled) as judges or overlords. When we started Flybridge over thirteen years ago, we developed a firm mission statement that we would treat early stage founders as our valued customers and have lived by this mission throughout our history.

With our fourth fund, launched last year, we are thrilled to continue pursuing our mission of serving brilliant founders during the critical, formative stages of creating their world-changing startups. As part of our work leading into the new fund, we went on a listening tour – talking to founders about what they want and need from their venture capital partners. We heard a consistent set of themes: treat them with respect, bring real expertise to the table, and have an investment approach that is consistent with the new world of the capital-efficient startup.

Over the last few years, the needs of founders have changed dramatically. The advent of the cloud, open source development tools and lean startup practices have led to a different evolutionary pattern for startups. They need very little capital to get started and run value-creating experiments, yet require a lot of capital to scale. That’s great news for early stage investors such as ourselves, because it means our entrepreneurs can get more runway with our early stage dollars. It also means they love our approach as an activist seed investor – supportive throughout the company’s entire lifecycle and fully engaged despite the small dollars – not a “spray and pray” passive investor.

What has not changed is that the best founders want experienced guidance, support and value-add, but not interference from their investor partners. And with all the blogs, books, courses and case studies out there about entrepreneurship, the bar for delivering value-add has gotten even higher. In our experience, great entrepreneurs don’t want to be hatched, incubated, promoted or optioned. They want a VC to be a company-building partner to coach them throughout all the stages of growth and an investment partner who has a deep understanding of the market opportunity they are targeting. That’s the firm we have tried to build at Flybridge, and we’re proud of what we’ve created and the amazing entrepreneurs we’ve had the opportunity to work with to build large, valuable companies.

So what opportunities are we focused on with our new fund? A number of years ago, we identified a few core investment themes which we still love, including:

The advent of the cloud as the next application platform, in combination with the rise of the grassroots developer as the driver of IT decision-making – our “developer-driven” investment thesis – which includes MongoDB, Crashlytics and Firebase, among others.

The explosion of data, leading us to be awash in information but starving for insight, leading to a massive opportunity for machine learning-based applications to emerge, applying “programmatic thinking” to numerous business problems, similar to what DataXu, Mattermark and ZestFinance are doing, among others.

A few emerging themes that we are excited about going forward include:

The next generation approach to enterprise computing, which is “outside in”, resulting in IT requiring new security models and a “control plane” paradigm to monitor, manage, scale and secure the disparate cloud applications and infrastructure – examples in our portfolio include BetterCloud, BitSight and NS1.

The rise of the “urban millennial”, a savvy, Net native consumer who views her smartphone as the remote control for her life – examples include Omni and Raden.

The globalization of startup talent yet the magnetic appeal of the US, resulting in many founders coming to the East Coast from all over the world. Israel has been a particularly exciting source of entrepreneurial talent in the areas that we focus (e.g., cloud, big data, security, machine learning) and we have increased time and energy sourcing deals from there, building off our work at tracx.

The new fund is smaller and more focused. We expect to partner with 20-25 companies, as compared to the 45 in our third fund. Our average commitment per company is now in the $4-8m range, when allocating enough in reserves to support companies during their growth years. Our geographical focus continues to be centered around our offices in New York City and Boston. Our team is small and senior – David and Victoria in NY and Chip with me in Boston, our new venture partner David Galper in Tel Aviv, alongside a group of over a dozen advisors who provide subject matter expertise and value add for our companies. Matt is leaving us to join Wellington Management Company and enter the world of late stage investing. We wish him well in his new endeavors.

We had an exciting 2015 – we made eight new investments out of the new fund and have a ninth that is closing this month (see our fun Year in Review): Jibo, NS1, Omni Storage, Raden, Redox, SmackHigh and two stealth companies. Based on the inspiring people we are privileged to invest in, 2016 is already shaping up to be another exciting year!

Like this:

Paul Graham sparked a furious debate over the last few days about inequality with his blog post, Economic Inequality. He points out that the focus of the dialog should shift from inequality to combating poverty and providing more economic opportunity. The power of entrepreneurship, mixed with technological disruption, is creating an "acceleration of productivity" that is leading to rapid, massive wealth creation. Paul's essay argues that we should celebrate this, not seek to suppress it, and instead focus on inequality and social mobility.

I like that Graham is sparking dialog on this important topic. He puts himself "out there", even if it means being exposed to some withering critiques.

His essay caused me to step back and reflect on the fact that I am seeing more entrepreneurs inspired to harness the power of some of the forces he describes – entrepreneurship, technology, innovation and shockingly fast productivity – to make a positive societal impact. I would like to see this trend continue. I'd like to see more Impact Entrepreneurs (a concept I first saw coined in an article in Wired Magazine by Adam Levene) not just wealth-creating entrepreneurs. Impact entrepreneurs are inspired to direct their entrepreneurial energy and skill to make a difference, help a group in society, right a wrong or turn around an injustice. Not just build the next Candy Crush Saga.

Don't get me wrong – I love wealth-focused entrepreneurs, too. As a venture capitalist, investing in and supporting entrepreneurs focused on turning Flybridge's seed and Series A investments into something very valuable is my day job. But if we want to unleash the full power of entrepreneurship and technological innovation to better society, more entrepreneurs need to direct their energy to truly making an impact. This effort can take a few forms. Some examples and trends are:

Mission-Driven, Double Bottom Line - Double bottom line companies measure their success on both financial performance and social impact. They are typically mission-driven companies with founders who are passionate about the mission for its own sake rather than financially driven where the company's focus is a means to an end. One of our portfolio companies (sprung out of Paul Graham's Y-Combinator), Codecademy, aspires to teach the world to code for free. The founders are focused on helping millions of people learn to code so that they can improve their job prospects and move up the income ladder. A company I co-founded back in 2000, Upromise, is focused on helping families save money for college, a necessary ticket to the American Dream. At its peak, Upromise helped over 10 million families save over $30 billion. Both of these companies are mission-driven, bottom-line for profit companies that raised lots of venture capital money, hired great people and built businesses focused on generating profits. There are many others like them, particularly in the world of education, health care and financial services.

Impact Investing – A new class of investors is emerging at the intersection of financially-driven investments and social initiatives called impact investing. I am seeing impact investing funds popping up all over the world (e.g., one from Israel came into my inbox this morning). Deval Patrick, former Governor of Massachusetts, recently joined Bain Capital to start a new impact investing fund to find a sustainable, middle ground between profitable investments and social responsibility. The field is still unproven and there are many questions to be sorted out (e.g., should the investment return target be similar to "regular" investing or consciously lower?), but this notion has led folks to talk about “triple bottom lines" for firms: financial, social, and environmental.

Public Entrepreneurship - Another powerful trend is directing entrepreneurial skills and efforts to innovate in the public sector. At Harvard Business School, Professor Mitch Weiss teaches a class called Public Entrepreneurship that focuses on this area. The notion is that entrepreneurs can work with civic leaders to make a difference in the world through technology, social change, and/or political transparency. Public Entrepreneurship can be for profit or not for profit. Not for profit examples include President Obama's Open Government Initiative, which has included making massive amounts of government data available to the public in machine readable form. Google's ambitious Sidewalk Labs is a for profit effort in this area, focused on applying technology to solve urban problems. The thesis of many public entrepreneurial efforts is that if both the government and the private sector can cooperate across silos, sharing information and tools to innovate together, we can materially improve the infrastructure and welfare of our communities.

Social Entrepreneurship (aka Non-Profits That Act Like For Profits) - Social entrepreneurs are non-profits that draw on business techniques to address social issues, but explicitly in a not-for-profit structure. EdX, an ambitious joint venture created by MIT and Harvard, is an an example of a non-profit that acts like a for profit. EdX hires top engineers and marketers focused on building an online learning platform that teaches college-level courses worldwide for free, radically expanding global accessibility to high quality education. Another example is Google.org, whose mission is to develop products that give nonprofits the technology or the funds they need to implement change. Since 2010, they have raised over $20 million to fight human trafficking and child abuse, which was given to multiple organizations that are ready to use the money quickly and effectively.

Each of these examples represents relatively new models for blending innovation, technology and entrepreneurship to achieve a social good. There are really interesting hybrid models forming, which is why Mark Zuckerberg did not create a charitable fund when he created his multi-billion dollar initiative, directing his wealth to social impact.

To further this trend, perhaps Y Combinator, Techstars and other accelerators should be creating a social entrepreneurship track. And more business schools should be creating public/social entrepreneurship courses to inspire young entrepreneurs to take their passion for social change and find ways to create scalable, positive impact.

Human progress is often the result of multi-disciplinarian efforts. I am optimistic that the trends Paul Graham points to – and is in the midst of helping accelerate – are going to ultimately have a very positive impact on society at all levels. But it will take some inspired entrepreneurs to get us there.